Even in a highly disrupted year like 2020, September is when many people take stock of their lives. Students are back to school (more or less). Football is back on TV. The 9/11 remembrances just took place and Jewish friends and colleagues rewind the Torah to “the beginning” on Rosh Hashanah (i.e. Hebrew New Year).
If you haven’t reached out to clients lately, it might be a good time to do so. Many are taking stock of their financial lives and could use some guidance in these unsettling times.
As author and philosopher, Ayn Rand famously said: “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”
Clients may not always listen to you, but you’re in unique position to be the expert driver who can help them avoid common potholes on the road to a successful retirement. To that end, several HB clients have been interviewed in the national media recently about early retirement mistakes. Here are some excerpts:
5 common early retirement mistakes
1. Not having a solid strategy to maximize income. This is one common mis-step that Tom Suvansri, founder of Premier Trust Advisors (Stamford, CT) often sees. “With pensions going away like dinosaurs, many new retirees are reliant on less than optimal withdrawal strategies that keep them from using more of their money,” he noted.
2. Panicking when the market drops and selling equity. Mark Rioboli, Director of Wealth Management at Wayne, Pennsylvania-based Independence Advisors, said it can be very difficult for an investor to build a portfolio over time and then start to withdraw from it in a down market. “When this happens, I point them back to their financial plan, and emphasize that their plan was developed with market declines built into the assumptions,” Rioboli added.
3. Spending too much without considering the long-term consequences. Dr. Guy Baker, Ph.D. founder of Wealth Teams Alliance in Irvine, CA, said it’s tempting for new retirees to splurge after all those years of building their nest egg. But, “being exposed to too much market risk can cause the overall security to diminish. Sequence risk is a very real problem and retirees needs to be well prepared for market disruptions,” Baker observed.
Rioboli agreed. “More leisure time often brings more travel, second homes, and other expenses. It’s amazing to see clients who were always prudent with their money during their careers start spending like crazy shortly after retirement. It’s our duty not to let them throw caution to the wind just because they’ve entered a new life stage with less day to day responsibility.”
4. Not preparing for market volatility (aka Sequence of Risk Returns) is one of the biggest missteps Suvansri sees early retirees make. “This touches on the transition from the Accumulation Phase to the Distribution Phase, which many have not considered carefully enough. With safe withdrawal rates at 3 to 4 percent, wouldn’t you want to use more of your assets than that?” asked Suvansri.
5. Relocating without thinking through the decision long-term. According to Rioboli, many early retirees decide to move closer to their children and grandchildren, or they buy a second property near the children. Sounds great on the surface, but when one of the children gets a great career opportunity requiring them to move out of the state if not the country. Meanwhile, the well-intended retirees “are stuck selling a new home” in an area where they may have few friends and family.
Why early retirees can’t help themselves
“Ignorance and poor planning,” said Baker, “is most often the culprit. Not having a plan to handle future taxation/rising taxes is another big one, according to Suvansri. “The vast majority of people have bulk of their retirement savings in tax-deferred accounts– 401k’s and IRAs–that are subject to future taxation.” If taxes rise, it can discourage them from using more of their assets since they don’t want to pay the tax bill, Suvansri added.
As irreverent baseball great, Yogi Berra often said: “A nickel ain’t worth a dime anymore.”
This may be Wealth Management 101 for many of you, but it never hurts to brush up during this era of unprecedented distraction.
1. Plan ahead and diversify assets into vehicles that can be used tax-free. This move can provide flexibility and control if taxes rise significantly (e.g. Roths and cash value life insurance, recommended Suvansri.
2. Segment assets into income capital and growth capital, recommended Baker. Income capital should be able to sustain the retiree for a minimum of three years, he noted. “A good retirement portfolio should be impervious to short term market disruptions,” Baker added.
3. Prepare for extreme volatility. “I tell clients to prepare for the inevitable volatility in the market. Keep several years’ worth of income in assets that are uncorrelated to the market. This way you can draw on that income if needed when markets go down suddenly,” Suvansri noted. “This gives you time to allow your market-driven assets to recoup and you can draw on them later when the market improves.”
4. Stick to your financial plan and closely monitor expenses, especially in early retirement. Having your primary income stop suddenly is very difficult for many new retirees, noted Rioboli. On the flip side, they may pare back too much on expenses and be afraid to enjoy themselves, especially in scary times like these. “When this happens, I point them back to their financial plan and show them that they will be fine.”
5. Prepare well ahead of time to coordinate assets that can create guaranteed paychecks for basic expenses in early retirement and maybe even “playchecks” for the fun stuff, advised Suvansri. “This will help new retirees maximize the income creation from their assets and manage the biggest risk we all face…longevity risk.”
As legendary entrepreneur and motivational speaker Robert Kiyosaki liked to say: “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
That’s where you come in as the trusted advisor.
What’s your take? I’d love to hear from you.
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